Publication

Update: Our analysis of the Supreme Court of Canada finding that Canadian Securities Act Unconstitutional

On December 22, 2011, a unanimous Supreme Court of Canada concluded that the proposed Canadian Securities Act (the “Act”), viewed in its entirety, is not constitutionally valid as presently drafted. Click here to read McInnes Cooper’s December 22, 2011 Legal Alert, “Supreme Court of Canada Finds Proposed Canadian Securities Act Unconstitutional”.

On May 26, 2011, the Government of Canada released the proposed Act, the immediate purpose of which was to create a national securities regulator in Canada. The Act included, among other things:

■registration requirements for securities dealers,

■prospectus filing requirements, and

■a framework for the regulation of derivatives.

Its underlying purposes were to provide investor protection; foster fair, efficient and competitive capital markets; and contribute to the integrity and stability of Canada’s financial system. The Act did not seek to impose a national system of securities regulation, but instead provided for a mechanism whereby the provinces and territories could opt in, if and when they chose to do so.

Concurrent with the release of the Act, the federal government referred the question of whether the Act is within the legislative authority of the Parliament of Canada to the Supreme Court of Canada and sought an advisory opinion of the Court under section 53 of the Supreme Court Act. Separate references were also brought to the Alberta Court of Appeal and the Québec Court of Appeal for determinations as to the constitutional validity of the proposed legislation. Both provincial appellate courts held that the proposed Act fell within provincial jurisdiction over property and civil rights pursuant to section 92(13) of the Constitution Act, 1867 (the “Constitution Act”) and was therefore not a valid exercise of federal power.

At the Supreme Court of Canada, the federal government, while acknowledging that certain aspects of securities regulation fall within provincial jurisdiction over property and civil rights, asserted that the securities market has so evolved that it is no longer a local matter but rather one of national importance that affects the country as a whole and that, as a consequence, the Parliament of Canada has legislative authority over all aspects of it.

The government, supported by various interveners, chose to confine its argument to the “general” branch of the federal trade and commerce power under section 91(2) of the Constitution Act, and therefore the Court was not asked to consider whether the Act would be constitutionally valid as an exercise of interprovincial and international trade and commerce – a separate branch of the federal trade and commerce power – or under any of the other federal heads of power under the Constitution Act.

In its written reasons, the Supreme Court traced the history of the various proposals for a national securities regulator in Canada, beginning with the Royal Commission on Price Spreads in 1935, through to the Porter Commission of 1964 and the 1967 “CANSEC” proposal of the Ontario Securities Commission, and on to the more recent work of the Wise Persons’ Committee in 2003 and the Crawford and Hockin Panels in 2006 and 2009, respectively.

The Court examined the field of securities regulation in Canada and noted that the provincial and federal governments have historically had legislative authority over different aspects of the field. The Court also looked to the experience of other federations, including Germany, Australia and the United States, to see how legislative authority over securities regulation is exercised as between federal and local governments.

The Court identified three key constitutional principles at play in its analysis of the reference question. The first is federalism, which governs the often delicate balance between the federal and provincial heads of power under sections 91 and 92 of the Constitution Act. The Court emphasized that, notwithstanding past decisions in which it has espoused a flexible and co-operative approach to federalism, the separation of powers is still entrenched in the Constitution Act.

The second principle is pith and substance, an analytical approach that looks at the purpose and effects of the law in question in order to determine its “main thrust”, which is then examined to see whether it falls under a federal or provincial head of power.

The third and final principle, the double aspect doctrine, recognizes that a particular subject matter may have both federal and provincial aspects, such that both the federal and provincial governments may enact valid laws which govern the subject matter from different perspectives. The double aspect principle allows for both laws to apply concurrently, but does not create concurrent jurisdiction over the subject matter in question.

The Supreme Court proceeded to review the jurisprudence with respect to the “general” branch of the trade and commerce power under section 91(2) of the Constitution Act. The Court noted that the scope of the general trade and commerce power was necessarily limited in order to preserve meaningful spheres of autonomy for the provinces, as was emphasized in Lawson v. Interior Tree Fruit and Vegetable Committee of Direction, [1931] S.C.R. 357 and Citizens Insurance Co. of Canada v. Parsons (1881), 7 App. Cas. 96. After reviewing cases such as General Motors of Canada Ltd. v. City National Leasing [1989] 1 S.C.R. 641 (“General Motors”), Attorney General of Canada v. Canadian National Transportation Ltd., [1983] 2 S.C.R. 134 and Kirkbi AG v. Ritvik Holdings Inc., 2005 SCC 64, [2005] 3 S.C.R. 302, the Court concluded that the federal government’s power to govern general trade and commerce is confined to matters that are genuinely national in scope and importance and could not be effectively regulated by the provinces and territories.

The Court next undertook an analysis to ascertain the pith and substance of the Act by looking first at its purpose and effects. The Court determined that the Act’s purpose is to implement a comprehensive Canadian regime for the regulation of securities with a view to investor protection, the promotion of fair, efficient and competitive markets and ensuring the integrity and stability of the financial system. The effects of the proposed Act, according to the Court, would be to duplicate and displace the existing provincial and territorial securities regimes, replacing them with a new federal regulatory scheme.

When viewed as a whole, the Court determined that the “main thrust” of the Act is to regulate, on an exclusive basis, all aspects of securities trading in Canada, including the trades and occupations relating to securities in each of the provinces and territories.

Having identified its main thrust, the Court applied the following five non-exhaustive indicia set out in General Motors in order to determine whether the Act falls under the general trade and commerce power:

1.Is the law part of a general regulatory scheme?

2.Is the scheme under the oversight of a regulatory agency?

3.Is the law concerned with trade as a whole rather than with a particular industry?

4.Is the scheme of such a nature that the provinces, acting alone or in concert, would be constitutionally incapable of enacting it?

5.Would failing to include one or more provinces or localities in the scheme jeopardize its successful operation in other parts of the country?

The Supreme Court found that both the first and second criteria had been met, since the Act would institute a national regulatory regime under the oversight of a national regulatory body. In regards to the third element of the General Motors test, the Court found that while some aspects of the proposed Act were concerned with trade as a whole, the Act went beyond these matters and constituted detailed regulation of all aspects of the securities industry, an industry which has historically been regulated provincially. The federal government’s main argument was that trading in securities has evolved over time to become a matter of genuine national concern, but the Court found that the government failed to present any evidence to support this assertion. Furthermore, the Court observed that the close similarity between the structure and terms of the proposed Act and the existing provincial regimes belied the suggestion that the securities market had been wholly transformed.

With respect to the fourth General Motors factor, the Court acknowledged that the provinces and territories, acting together, are constitutionally incapable of sustaining a national scheme aimed at the genuine national goals of the Act, including management of systemic risk and Canada-wide collection of data. However, the Court found that the federal government had gone far beyond these genuine national goals in the proposed Act by attempting to regulate all aspects of securities.

On the fifth branch of the General Motors test, the Court once again acknowledged that, with respect to the genuine national goals of the proposed Act, the failure of one province or territory to participate in the scheme could prevent its successful operation. However, viewed as a whole, the main thrust of the Act, which is the day-to-day regulation of securities, would not be hindered by the failure of one or more provinces or territories to participate in the scheme.

Having applied the five General Motors indicia, the Court concluded that the securities industry in Canada has not evolved to the point where the day-to-day regulation of all aspects of the industry has become a matter of national concern and that the proposed Act, viewed as a whole, goes beyond Parliament’s powers to legislate with respect to general trade and commerce and is therefore not constitutionally valid as currently drafted.

Subsequent to the release of the Supreme Court of Canada’s decision, the Government of Canada has indicated that it will not proceed with the proposed Act. It remains to be seen whether efforts to establish a national securities regulator in Canada will continue to be pursued.

Please contact any lawyer in our Corporate Finance and Securities Group for discussion regarding this Legal Update or any other matter.